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Crude Oil Analysis for the Week of December 12, 2011

January Crude Oil futures had a strong surge on Friday, but still managed to close lower for the week. Renewed buying helped prices rise for the first time after three consecutive lower-lows. News that the European Union was close to reaching a possible solution to the Euro Zone crisis triggered the turnaround in prices.

Brent Crude Oil in London finished 53 cents higher, but West Texas Intermediate rose a lofty $1.07. Despite the strong showing on the daily chart, the weekly chart indicated a slightly lower trade. This was not enough, however, to reverse the market’s course.

Based on the main range of $115.22 to $75.36, crude oil finished slightly below the 61.8 percent retracement level of this range at $99.99. This doesn’t mean too much at this time since it is still holding above the important 50 percent level at $95.29.  Downtrending Gann angle resistance starts this week at $99.22 so technically, crude oil is above this price, indicating strength. Major support remains the uptrending Gann angle at $95.36.

Crude Oil Price Movements

The short-term chart shows that $103.37 to $94.99 is the new near-term range. A breakout over the higher price could trigger a quick move to a downtrending angle at $107.22. The weekly chart gets interesting when looking at the market’s downside potential. Currently a major support cluster exists at $95.36 to $95.29. A break through this area will be the first sign of weakness, but a trade through the daily swing bottom at $94.99 could trigger the start of a break to $89.37- $86.06 over the short-run.

The crude oil market has been hanging around the upper end of its two month range for four weeks. Some traders are blaming algorithmic or high-frequency traders for holding prices up at these levels. Even with a solution to the Euro Zone crisis on paper, bearish traders believe that following a short-term impulsive spike to the upside, prices are likely to come down due to the massive debts in Europe. Traders are expecting a drop in demand and consumer spending along with slashes in government spending to trigger a new recession.

The real reason why crude oil remains vulnerable to the downside is the lack of clarity and conviction by the European policymakers. With their backs against the wall because of numerous failures in the past, the possible deal that was cut on Friday has to stick or Europe may plunge into a recession sooner than expected especially with financial reforms in the form of austerity measures looming.

Crude oil traders will be watching for a follow-through rally this week following Friday’s late session surge. They are likely to take their clues from the Euro and the equity markets. If these markets rise, then this will serve as a sign that traders are willing to take on additional risk. It may be too early to tell when traders will begin pricing in a European recession, but what is clear is that if the support cluster at $95.36 to $95.29 on the weekly chart fails then the market may take a hard hit.

Factors Affecting Crude Oil This Week:

Supply and Demand:  Last week it was announced that crude oil inventories rose 1.3 million barrels the week-ending December 2. If the report based on the week-ending December 9 also shows a rise then this may serve as a sign that demand is already beginning to fall. If the downtrend in demand continues then it may mean that buyers are already anticipating the possible recession in Europe spreading to the U.S.

European Sovereign Debt Crisis:  The question that may be answered this week is will the European summit agreement be strong enough to put an end to the European sovereign debt crisis? Friday’s headline may be enough to drive crude oil prices higher on the opening next week, but will it be enough to sustain a rally. Traders should be watching for a “buy the rumor, sell the fact” situation.

U.S. Economy:  The U.S. economy continues to show some signs of growth, but at a very slow pace. There is definitely an air of caution as businesses and consumers wait for something concrete to develop out of the Euro Zone. Traders will be watching Europe this week so any surprise news regarding the U.S. economy is not likely to move the market substantially.
Middle East Conflicts:  After years of ignoring developments in the Middle East, traders are beginning to pay more attention. At the forefront remains Iran. Traders are fairly certain that U.S. and European-led sanctions are going to be implemented, but the consensus is that they will be enforced after the winter heating oil season. This means that military action by Iran may be the key factor to watch for until the spring.

By. FX Empire

FXEmpire.com is the Forex flagship site of the FX Empire Network. The FX Empire Network provides readers with the most expert and most timely technical analyses, fundamental analyses and news-pieces; this in order to empower them to make for themselves the best possible financial decisions. The FX Empire Network’s other flagship sites include: StocksEmpire.com and CommoditiesEmpire.com.

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